Bank of Canada keeps rate unchanged

Yesterday, December 6th, 2023, Bank of Canada made it’s latest rate announcement. This is the 8th and last one for this year. The next rate announcement is scheduled for January 24, 2024.

The Bank of Canada has decided to keep its overnight rate target unchanged, and is keeping rates at 5% for a third consecutive announcement as an evidence that previous rate hikes have proved effective in cooling the economy. And is also continuing with its quantitative tightening policy.

The global economy is experiencing a slowdown, and inflation is further decreasing. The US has seen stronger than anticipated growth, primarily driven by solid consumer spending. However, this growth is expected to slow down in the coming months due to the impact of previous policy rate hikes.

The euro area is witnessing a slowdown in growth, which, coupled with falling energy prices, has led to a reduction in inflationary pressures. Oil prices are approximately $10-per-barrel less than what was projected in the October Monetary Policy Report. Financial conditions have become more relaxed, with long-term interest rates reversing some of the significant increases observed earlier in the fall. The US dollar has depreciated against most currencies, including the Canadian dollar.

In Canada, economic growth has been stagnant during the second and third quarter of 2023. Real GDP decreased by 1.1% in the third quarter, following the second quarter growth of 1.4%. The rise in interest rates is evidently curbing spending: consumption growth in the last two quarters was nearly zero, and business investment has been inconsistent but essentially unchanged over the past year. Exports and inventory adjustments detracted from GDP growth in the third quarter, while government spending and new home construction contributed positively. The labour market is showing signs of easing: job creation has not kept pace with labour force growth, job vacancies have further decreased, and the unemployment rate had a slight increase. Nevertheless, wages are still growing by 4-5%. The data and the indicators for the fourth quarter suggest that the economy is no longer experiencing excess demand.

The economic slowdown is leading to a reduction in inflationary pressures across a widening range of goods and services prices. This, along with the fall in gas prices, contributed to the decrease in CPI inflation to 3.1% in October. Nonetheless, cost of housing inflation has accelerated, reflecting faster growth in rent and other housing costs, as well as the ongoing impact of high mortgage interest costs. In recent months, the Bank’s preferred measures of core inflation have hovered around 3½-4%, with the October data leaning towards the lower end of this range.

Given the additional evidence that the monetary policy is moderating spending and reducing price pressures, the Governing Council has chosen to maintain the policy rate at 5% and to continue normalizing the Bank’s balance sheet. The Governing Council remains concerned about risks to the inflation outlook and is ready to increase the policy rate further if necessary.

The Council is keen to see a continued and sustained reduction in core inflation, and continues to concentrate on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.

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Please note that this information is current as of the time of writing and is intended for general informational purposes only. It should not be relied upon as financial advice. Always consult with a mortgage professional for advice tailored to your specific circumstances.

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